Home / Companies / News /  KPIT Systems’ profit warning a rude shock for investors

Just when it had seemed that KPIT Systems Ltd was well and truly on the turnaround path, the company issued a warning.

It said revenues are expected to decline by 4% in the June quarter because “traditional revenues from ERP (enterprise resource planning) implementations are affected more than anticipated earlier".

At the end of the March quarter, it had said revenues were expected to be flat in the June and September quarters.

Even though the commentary about flat revenue growth was far from exciting, one-year returns of KPIT shares had risen to as high as 100% by end-June.

This was because the company had done a good job of turning around on the profitability front, and investors assumed that it will only be a matter of time before revenue growth followed suit.

In this backdrop, it’s hardly surprising that the revenue warning came as a rude shock.

KPIT shares fell by as much as 15% on Friday.

On the profitability front, things had turned around quite dramatically in the previous fiscal year.

In the March 2015 quarter, KPIT reported an earnings before interest, taxes, depreciation and amortization (Ebitda) margin of merely 4.5%. In the March 2016 quarter, margins improved to 15.7%.

While this was partly aided by forex gains, a large part of the improvement came about because of operational efficiencies.

KPIT’s management had told analysts that its strategy is to first improve profitability, which will be followed by an improvement in predictability and growth.

While the company has delivered on its first objective, it looks like investors will have to wait before the other things fall in place.

As it is, analysts at ICICI Direct were estimating a revenue growth of merely 6.9% between FY16 and FY18.

Now, after the profit warning, growth estimates would be even lower.

The brokerage cited weakness in select business units and an uneven margin profile in the SAP business unit as the reason for the muted growth projections.

KPIT also has an 18-20% exposure to the troubled energy and utilities sector, which has impacted growth.

Although KPIT shares fell sharply on Friday, one-year returns are still decent at around 70%.

Given the dramatic turnaround in margins last year, investors are likely to give the company some more time for delivering on revenue growth.

Of course, if the company’s troubles continue into the second half of the year, they may well lose patience.

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